Top officials of the Nigerian Stock Exchange (NSE) at the recent AGM in Lagos. Photo: Business Hilights

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There are apprehensions that the robust and deep inflow of foreign capitals at the Nigerian Stock Exchange (NSE) championed by Foreign Portfolio Investments (FPIs) in 2017, may begin to wane very soon.

Key reasons why the erosion is imminent cannot be unconnected with fears associated with election year in African countries and the observed kids gloves so far deployed in suppressing the excesses of Fulani herdsmen in more than 50 per cent of the entire 36 states and the FCT.

Only recently, the Nigerian Stock Exchange (NSE), was rated amongst the best in the world with FPIs in 2017 hitting N1.208 trillion. The amount accounted for about 48 per cent of total transactions.

Business Hilights recalls that FPI consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market. Foreign portfolio investment differs from foreign direct investment (FDI), in which a domestic company runs a foreign firm, because although FDI allows a company to maintain better control over the firm held abroad, it may face more difficulty selling the firm at a premium price in the future.

FPI is part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one monetary year. It includes the country’s capital investments, monetary transfers, and the number of exports and imports of goods and services.

Differences between FPI and FDI

FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country. Because the investor does not actively manage the investments or the companies that issue the investments, he does not have control over the securities or the business. However, since the investor’s goal is to create a quick return on his money, FPI is more liquid and less risky than FDI.

In contrast, FDI lets an investor purchase a direct business interest in a foreign country. For example, an investor living in New York purchases a warehouse in Berlin so a German company can expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.

The investor controls his monetary investments and actively manages the company into which he puts money. He helps build the business and waits to see his return on investment (ROI). However, because the investor’s money is tied up in a company, he faces less liquidity and more risk when trying to sell his interest.

The investor also faces currency exchange risk, which may decrease the value of his investment when converted from the country’s currency to U.S. dollars, and political risk, which may make the foreign economy and his investment amount volatile.

2017 data also showed that FPI, which was N1.539 trillion in 2014, however, shrank to N518 billion in 2016, but increased significantly by 133 per cent in 2017.

Further analysis of the data also showed that over an 11-year period, domestic transactions have decreased by 62.46 per cent from N3.556 trillion in 2007 to N1.335 trillion in 2017

However, there was a significant increase in 2017 by 111 per cent from N634 billion recorded in 2016.

The data showed that total transactions at the nation’s bourse significantly increased by 72.64 per cent from N278.49 billion recorded in November 2017 to N480.80 billion (about $1.57 billion) the next month.

The aggregate value of transactions from January to December 2017 increased significantly by 68.25 per cent from N1.511 trillion recorded in 2016 to N2.543 trillion in 2017.

Total FPI increased by 37.56 per cent from N150.10 billion recorded in November 2017 to N206.48 billion in December 2017.

Domestic Transactions significantly increased by 113.66 per cent from N128.39 billion to N274.32 billion within the same period.

The FPI outflow includes sales transactions or liquidation of portfolio investments through the stock market, while the FPI inflow includes purchase transactions on the NSE (equities only).Total domestic transactions significantly increased by 434.63 per cent between January and December.

Besides, the institutional composition of the domestic market increased by 673.97 per cent, from N31.19 billion in January to N241.40 billion in December.

This is as the retail composition also increased by 63.62 per cent from N20.12 billion to N32.92 billion within the same period.

This indicates a higher participation by institutional investors over their retail counterparts. Since 2011, FPIs have consistently outperformed domestic transactions, but there are fears that if the body language of politicians ahead of 2019 elections is not well managed alongside the killings allegedly perpetrated by herdsmen, chances are that FPIs may collapse to the detriment of the entire economy.

Business Hilights is an online news channel conceptualized and structured to report and track on a daily basis; latest developments in critical business sectors to serve as a one stop news gateway for governments, foreign and indigenous investors.